The Descent

One extreme view of how long this market will last.

Nouriel Roubini is a professor of economics at the Stern School of Business at NYU and chairman of Roubini Global Economics, an economic consultant group.

Y ou follow housing markets nationwide. What do you see happening?When supply increases, prices fall: That’s been the trend for 110 years, since 1890. But since 1997, real home prices have increased by about 90 percent. There is no economic fundamental—real income, migration, interest rates, demographics—that can explain this. It means there was a speculative bubble. And now that bubble is bursting.

So the New York market is poised for a fall? I’m bearish on the city. I live in Tribeca in a nice loft, and in four years, it’s increased 150 percent in value. That price appreciation doesn’t make sense. Now there are maybe twenty developments under construction in my neighborhood that are going to come to market in the next year. There’s going to be a huge glut. I see demand falling and supply going sharply up. So you’re going to see some pretty nasty price action.

But some people say that New York is not like the rest of the country. I don’t agree. New York might be different, in part because of zoning and other regulations, but in the last few years, there has been a major change here: a huge increase in the supply of housing. When there is speculative demand, when prices go up, you want to buy and have a capital gain. But that speculative demand is going to disappear now because prices are flattening and falling.

What about foreign buyers? The U.S. economy is slowing down, and the dollar is weakening relative to the euro and other currencies. If you’re a foreigner and buying in dollars, you’re going to have a capital loss on the currency. So why would you want to buy today and get a capital loss of 20 or 30 percent? You can wait six months or a year and buy the bargain.

Does it matter that co-ops make up a large majority of the housing stock in Manhattan? There’s a glut of new condos, and it’s getting worse. This will affect both condo and co-op prices. A home is a home, and excess supply leads to prices falling.

What about Wall Street bonuses? There are rumors that they’ll be sizable again, and brokers say bankers, traders, and hedge funders like to use their bonuses to buy real estate.Wall Street will not rescue the housing market in New York for two reasons: First, there is a limited number of investment bankers and Wall Streeters. They already own homes, and their demand is constant—if they sell a property and buy another one, the net demand is unchanged. Second, Wall Street has been doing well, in part, because we have been living in a bubble, and it is bursting. We’re going to have a national recession in early 2007, and Wall Street profits and bonuses will sharply drop, limiting the wealth of these Wall Street bankers and traders. Also, hedge funds are doing lousy this year; returns for many hedge funds are below safe Treasury bills.

Some people say that there is so much wealth here that there will always be buyers for high-end properties. That’s nonsense. It’s not as if there’s infinite wealth. There are thousands of new luxury units coming on the market, and the question is, who will buy them? If people start losing jobs, who can afford to pay 2, 3, 4, 5 million dollars? Do you know 10,000 new investment bankers on Wall Street?

Are brokers spinning when they say, “Oh it was just crazy before—it’s still going up, but it’s just more realistic now.” That’s wishful thinking. We don’t have hard data yet on what exactly is happening in the market, but we know that prices of homes are sluggish. Some of the price action is going to come in the next few months when the supply increases, demand falls, and the national economy slows down.

What about people like you who bought years ago? The increase in the value of their home is not making people richer. If I were to sell today and buy a property that has the same amenities, I would have to pay the same price. So I’m not wealthier, even though my home has gone up in value. What has happened in the past four years is that the real price of my housing service has doubled. I’m paying more to live in that home.

Will there be a fire sale in the city?I’d expect prices to be 5 to 10 percent lower a year from now, on average. On the national level, real home prices may fall 20 to 30 percent.

What would you advise buyers and sellers to do? If you’re a buyer, wait, or at least don’t be buying based on an expectation of increasing values. If you’re a seller, rushing won’t make any difference, because it’s very hard to sell. If everybody rushes to sell, the glut is going to become worse.

So the ride is over? Not only is it over, it’s going to be a nasty fall.